Free thinking from Grayling people

Grayling Brussels' Brexit Bulletin - 16 March 2017

If business was looking for reassurance this week, should the UK leave the EU with no deal agreed, it was destined for disappointment.

During the Brexit Committee meeting in Westminster, UK Brexit Minister David Davis admitted that no costed assessment had been made of the so-called "cliff-edge" option, namely the prospect of the UK leaving the EU without any trade agreement with the EU.

In such a scenario, the UK would likely default to WTO rules, which would immediately introduce trade tariffs on a range of products which are regularly imported and exported from the UK.

Whilst UK Foreign Secretary Boris Johnson - amongst others in the Conservative Party - claims that such a scenario would not be the end of the world, most of the business representatives Grayling Brussels speaks with think very differently. Defaulting to WTO rules remains very much the worst-case scenario.

All the more surprising then that Theresa May has previously stated that she would rather have no deal than a "bad deal". Notwithstanding the fact that a "bad deal" has not been defined, advocating a "no-deal" option whilst having little idea of the impact on business might seem slightly reckless.

With the majority of business hoping that much of the status quo remains - "as long as our operations aren't affected, Brexit can take whichever form it likes" - the WTO remains the nightmare scenario.

Viewed from this perspective, nothing that has been said this week can be reassuring for business.

If you have any suggestions about the Brexit Bulletin or want to find out more about a specific aspect of Brexit, please do let us know. Please visit the Grayling Brussels website, follow us on Twitter @TheEULobby, and don't forget to check out our Brexit Papers.

Brexit cocktail in Brussels!

Not bored of Brexit yet? Nor are we!

On 30 March - in the same week Article 50 is likely to be triggered - the Grayling Brexit Unit (GBU) is hosting a Brexit Cocktail from 6pm at our offices, Avenue des Arts 46, Brussels.

We want to highlight how business can approach Brexit as an exercise in damage limitation and make the most out of a difficult situation.

The event will bring together major businesses, EU/UK decision-makers, and leading academics to discuss how we can understand, approach and shape what Brexit means for the future EU-UK trade dynamic.

We have already secured a number of industry speakers to take part in the panel.

Article 50 to be triggered in final week of March Theresa May is likely to trigger Article 50 in the final week of March, now that both Houses of Parliament approved the so-called "Brexit Bill" with no amendments at the start of this week - essentially authorising her to trigger Article 50 whenever she sees fit. MPs stuck to their guns and voted down the two amendments put forward by the Lords in first reading - namely the protection of EU citizens in the UK and a "meaningful vote" for Parliament once a Brexit deal is reached - and the Lords followed suit.

The Grayling viewSo in the end it was easy for May to push through the Brexit Bill - but soon the work will really begin. Once Article 50 is triggered - and it seems almost definite that this will happen later this month - the UK loses control of the narrative, and the phoney war ends. The EU, for its part, is relatively aligned, and is all set to start negotiations. Meanwhile, the UK is still hiring trade negotiators. It may not be so easy for May in the coming months.

Sturgeon displays her hand on Scottish IndependenceOn Monday Scottish First Minister Nicola Sturgeon said she would consult the Scottish Parliament on holding a second Scottish independence referendum between Autumn 2018 and Spring 2019. Sturgeon believes that Scotland’s backing of Remain by 62% gives her a “cast iron mandate” to protect its access to the Single Market. As the UK’s negotiating strategy continues to solidify around a ‘hard’ Brexit, Sturgeon accused Downing Street of having forgotten “the language of partnership”, adding that if Scotland’s voice can be ignored on this issue “our voices and interests can be ignored at any time." If the Scottish Parliament gives its consent, Sturgeon can then start formal discussions with Theresa May, who is constitutionally responsible for granting a vote.

May has accused Sturgeon's Scottish National Party (SNP) of using government as a “platform from which to pursue constitutional obsessions," advising the SNP to “get on with the day job”. Elsewhere, in a blow to Scotland’s Single Market aspirations, the Spanish Foreign Minister Alfonso Dastis suggested that an independent Scotland would be at the back of the queue if it wants to join the EU, confirming that “Spain supports the integrity of the United Kingdom and does not encourage secession or divisions in any of the Member States.”

The Grayling View: Acutely aware of possibly wasting this opportunity, Sturgeon is mindful that if the vote were held today she would lose - according to recent polling 51% back staying in the UK. In addition, the economic case for independence has deteriorated since 2014, with weak oil prices underlining the relative unprofitability of North Sea reserves and the financial sector in Edinburgh struggling under present uncertainties. Other risks include the loss of the pound, a hard border with England, and a Spanish veto on EU membership.

However Sturgeon, whilst committing to hold a vote, has given the SNP a large window of opportunity. This breathing space is key. It provides ample time for the expected Brexit slowdown in the UK economy to take hold and to bite more deeply in Scotland. Economic pain could mean support for the Single Market begins to translate into a majority for independence. Brexit itself illustrates how emotive sentiments of alienation from centralised authority can trump cold economic calculations.

Perhaps more significantly, Sturgeon has put the UK Government on the back foot, even before it loses the control over Brexit that it has enjoyed since 23 June. May will likely be forced to grant the Scots a vote and now faces a fundamental choice. Persist in the pursuit of a ‘hard’ Brexit, linked to widespread English concerns over immigration, or risk cutting Scotland adrift.

Northern Ireland and Wales signal intentions to hold referendumsFollowing on from the Scottish announcement (see above), the new Leader of Sinn Féin Michelle O’Neill called for a referendum in Northern Ireland "as soon as possible" on the province joining the Republic of Ireland. “Brexit will be a disaster for the economy, and a disaster for the people of Ireland," she said. 56% of Northern Irish voters backed Remain in the referendum in June.

On the same day, the leader of the Welsh party Plaid Cymru Leanne Wood said that a Welsh referendum on independence could be possible if Scotland decides to go its own way.

The Grayling viewThe dominoes are falling one-by-one. The balance of power in Northern Ireland is very delicate, and the province still has no government after recent elections, but if Scotland decides to hold a referendum, then a Northern Irish referendum could be on the cards. Wales voted to leave the EU in the referendum, which sets it apart from Scotland and Northern Ireland, but even here, if England is seen to be wielding its power unfairly, and if Brexit begins to have a damaging effect on the Welsh economy, a future referendum is not out of the question.

Committee report highlights possibility of no dealThe House of Common's Foreign Affairs Committee has published a report stating that there is a "real" possibility that the UK will leave the EU without a deal and that the Government should already start planning for such a scenario. “Even if all sides enter into the process with goodwill and the desire to ensure a successful outcome there are many reasons why the negotiations might fail,” it said. It highlights the "divorce bill", a hard border between the Republic and Northern Ireland, and citizens' rights as being major sticking points. The report also suggested - as Theresa May has done - that no agreement might be better than a bad agreement - for example, the UK having to pay large amounts into the EU post-Brexit.

Additionally, on 15 March Brexit Minister David Davis admitted that the Government had not done a costed assessment of the impact of leaving the EU without an agreement in place.

The Grayling viewThe prospect of there being no agreement is the nightmare scenario for industry, and few want a default to WTO rules. This is the "cliff edge" scenario, but this report seems to suggest that whilst this needs to be planned for, it may actually be better than a bad deal. Of course, this can be disputed, and it depends on what a "bad deal" would entail, but at any rate industry may feel that the worst possible deal is indeed the "cliff-edge" scenario - in which case it needs to make its feelings plain to the UK Government.

The highlights from North America

Mars warns of increased prices in event of defaulting to WTO The food company Mars has warned that the cost of its products could rise if the UK leaves the EU and defaults to WTO rules, leading to additional tariffs on confectionery of as much as 30%. “Unfortunately, there is no way that those costs could be absorbed without flowing through to consumers in the form of higher prices,” the company said. A survey published by the Food and Drink Federation has found business confidence declining since October due to higher commodity costs, squeezed profit margins, and uncertainty over Brexit. Mars also sounded a word of caution about the UK adopting its own legislation regarding food products: “If, over time, the UK gets significantly out of step with the EU regulatory environment, then it will impact negatively on its ability to trade with its nearest neighbours,” the company said.

The Grayling viewMost attention has been paid to the financial and automotive sector, but Mars is clearly worried enough to go to the press and explain its side of the story from the food industry perspective. Defaulting to WTO rules has been said by the Government to be better than "a bad deal", but Mars seems to dispute this. Expect more companies to follow in Mars' wake, particularly if the WTO continues to be seen as a viable option for the UK post-Brexit.

The highlights from Europe

Poland wants EBA offices to be moved to Warsaw post-BrexitPoland wants to bring the European Banking Authority (EBA) to Warsaw after the UK leaves the EU. The idea was put forward by the head of the Polish financial market regulator, Marek Chrzanowski.

Meanwhile, Deputy Prime Minister Mateusz Morawiecki has said that Poland has attracted 30-35,000 jobs since the Brexit referendum. He also emphasised that migration from Poland to the UK is the lowest in history.

The Grayling viewRelocation of the EBA to Poland would be a symbolic gain for the country, and would showcase its ambition to become a fintech and financial innovations hub for the CEE region. However, Poland has to reassess its dipomacy if it wants to build a coalition around this proposal, after the recent dispute over Donald Tusk's reelection as President of the European Council. Paris, Frankfurt, Luxembourg and Vienna are also interested in hosting the EBA. Poland will have its work cut out!

MEPs play it tough on BrexitThe European Parliament (EP) is currently working on a Brexit Resolution, which will define its priorities in the upcoming negotiations. The Parliament, which has a veto over the final Brexit deal as well as the possible trading relationship, seem to be adopting a tough stance. MEPs are pushing for any Brexit deal to be subject to the European Court of Justice and for the UK to abide by the EU’s tax standards. In addition, MEPs will also insist the UK “fulfills all its commitments” to the EU budget.

The Parliament text also states that “the possibility of no agreement cannot be excluded”. While Theresa May has insisted she would rather walk away than accept a “bad deal”, Donald Tusk, the President of the European Council, said “a no-deal scenario would be bad for everyone, but above all for the UK because it would leave a number of issues unresolved.” The Parliament is planning to adopt this text in plenary on 3 April, the week following the likely triggering of Article 50.

The Grayling View Although the European Parliament will have a veto over the final Brexit deal, it will not be involved in the day-to-day talks. In addition its resolution is not legally binding. Nonetheless, this Resolution will provide an accurate indication of the EU’s political standpoint and its red lines. With its veto, it could still thwart any final Brexit agreement.

Our Grayling Brexit Unit brings together the very best consultants from across the Grayling network and includes those who have direct experience of working alongside the leading political figures charged with negotiating Brexit in London and Brussels.

The Grayling Brexit Unit is here to support, guide and inform the success of your business and identify how the political dynamics will change as a result of Brexit in both London and Brussels. We are your Brexit experts.